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The trading positions
of the major bullion banks are not available to the public on
the Western
Exchanges. However, the TOCOM in Japan publishes each day the
position of all the
houses that have a seat on the exchange. I have been
following the
position of Goldman Sachs by capturing the daily data for more than
one year. Figure 1
compares the GS net short position (in red) with the gold price
(in yellow) from 13th
January 2006 to April 19, 2007.
GOLDMAN SACHS TOCOM
GOLD NET SHORT & GOLD PRICE
FIGURE
1
Goldman Sachs
reported record profits in 2006 of 9.5 B$ on 37.7 B$ of revenue,
paying their partners
highly publicized rich bonuses. Such amazing results made
me wonder if their
clearly outstanding investment acumen extended to their short
position in gold on
the TOCOM. Are they making fat profits by being perpetually
short gold?
I constructed what
their profit and loss statement should look like. I have taken a
short sale as
generating immediate revenue equal to the number of ozs sold
short multiplied by
the gold price on the day of the short sale. This also creates a
liability to provide
the gold or cover the short at some point in the future which we
will deal within a
moment. Covering short contracts is treated as an expense or
negative revenue
which is the number of ozs covered multiplied by the price of
gold on the day of
covering. Buying long contracts are likewise an expense and
selling long
contracts generate revenue. I have assumed that there are no
commissions to pay or
overhead costs to trade on the TOCOM, which is clearly
not the case and
would be additional actual expenses.
This covers the “cash
flow” view of the trading position. But we need to consider
the cost of closing
out the short position or the credit from closing a long position.
If we don’t do
this it would be like saying I made $300,000 by selling my house
for that price,
omitting to count that I have a $290,000 mortgage that was taken
to cover the purchase
price which I have not yet paid off! The true liquidated
value from the house
transaction is $10,000 net profit. Likewise Goldman Sachs
has a liability of
covering the short contracts which is equal to the cost of buying
the equivalent amount
of gold bullion or a credit of the value of selling the
equivalent amount of
gold of any long contracts. So as a next step I calculated
the cost and/or
credit of closing out all positions along with the cash flow gains or
losses to yield the
cumulated Liquidated Value (LV) of the Goldman Sachs
TOCOM gold position
at any time (referenced to 13th January 2006 as the start
date).
POG & GOLDMAN SACHS TOCOM POSITION LIQUIDATION VALUE
 
FIGURE 2
In figure 2 this
total Liquidated Value is shown from Jan 13th, 2006 to April 19,
2007. It can be seen
that the Liquidated Value of the Goldman Sachs TOCOM
gold position is
nearly always a net loss! Last May when the Gold price soared to
$740/oz their net liquidated
loss soared to $220 million. When the Cartel called in
help from the
Official Sector gold hoards they were able to cover on the
correction to bring
their net loss to zero again.
The net loss of their
LV has been slowly growing since last October. The gold
price has risen
inexorably $130/oz from its October 2006 lows. Recently GS has
been making massive
short coverings. In just two sessions this week they
covered 9,645 short
contracts, they also had a massive covering on March 6
(see circles in figure
1). Why did they suddenly run for the hills?
There is a clue in
this graph of what is going on. I have drawn a line at $100
Million net loss.
Notice that every time the net loss reaches this point action is
taken to reduce the
net loss. The only exception was when the gold price soared
to $740/oz in May
2006 when the gold price clearly escaped from the Cartel
capping scheme and
was only brought back under control by enlisting help of
official sector
physical gold to dump on the market. But if you look carefully
before the net loss
soared there was an attempt to bring down the gold price just
when the net loss
touched $100 million. The attempt, however, failed.
It would appear to me
that the GS traders on the TOCOM have a standing
approval from their
credit committee that their liquidated net loss can not exceed
$100 million. This is
what has likely triggered the recent panic short coverings
(and a similar one in
March) because it is bumping up against this level. What
can be seen from the
graph is that even after covering almost 30% of their short
contracts their LV is still sitting around negative $100 Million! If this is their limit it
would seem that they
don’t have any spare ammunition to attack the TOCOM
market without asking
the credit committee for more. Credit Committees exist to
prevent traders from
bankrupting a company such as Nick Leeson did with
Barings Bank. It is
unlikely that the Credit Committee would be willing to approve
more credit to
increase a losing position! Is this their Achilles Heel? Are they
having to cover to
keep within their Credit Committee guidelines of approximately
$100 Million net loss
and are not free to short further to suppress the gold price
without more credit
being approved? I don’t know, but it bears watching and
could be a dynamite
discovery. If the position is closed out immediately the paper
loss will be realized
at around $113 million. If the gold price continues to rise the
losses will increase.
If their credit is
extended and GS attacks the gold price by increasing their short
position at this
point they are extremely vulnerable to the longs with deep
pockets.
Considering that the
Goldman Sachs LV on TOCOM of their gold position has
almost never been in
a net profit it would appear that their motivations have not
been related to
making a profit! Their operation has been run as a loss but in a
controlled manner. We
know that keeping a lid on the gold price has been the
key to making big
profits in the currency, stock and bond markets, which is
probably why the $100
million loss on TOCOM gold has been allowed.
We are at a critical
juncture. Is GS going to be forced to cover their short position
or will they attempt
to a dangerous gamble and try to bring down the gold price?
Or will the market
escape from the chains of the gold Cartel suppression as it did
for a short while
last May? Considering that the ECB dumped 57 tons of gold on
the market last
month, only to see the gold price continue to rise must have the
Cartel sweating. It
is no wonder that they want to get their hands on IMF gold.
From my proprietary
analysis work all the key commodities of gold, silver, oil and
copper are
synchronously at BUY points and the dollar has broken key support.
The Cartel has now an Achilles
Heel and the bulls have the high ground.
Adrian
Douglas
Marketforceanalys.com
Adrian Douglas writes many articles
on his observations and analysis on financial markets, gold and silver
markets, and some selected company stocks. The articles were all initially
published at www.lemetropolecafe.com.
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